Rights, Duties and Liabilities of Auditor: I) Ii) Iii) Iv) V)

RIGHTS, DUTIES AND LIABILITIES OF AUDITOR
Powers/Rights of an Auditor (255)

i) Right of access to books of account and vouchers 255(1).
ii) Right to receive information and explanations.
iii) Right of access to books and papers of branch 255(2).
iv) Right to receive notices of general meetings and to attend those meetings. (255(6)).
v) Right to make representation where another person is being appointed as auditor. (253(3)).
Duties of an Auditor
a) Duties of auditor under section. (255(3)) are:
i) To give a report to the members on the accounts, books of account, balance sheet
and profit and loss account examined by him. (255(3)).
ii) Where any matter reported upon is answered in the negative or with a qualification
the report shall include reasons for such qualification with factual position.
iii) To include in the report of the company such matters as directed by the Federal
Government.
iv) To attend those general meetings of a listed company, either himself or through
authorized person, in which the balance sheet, profit and loss account and the
auditors' report are to be considered.
b) To make report for inclusion in prospectus. (Section 53 read with Part I of Schedule II).
c) To certify receipts and payments account in the statutory report (Section 157).
d) To make report on declaration of solvency in case of voluntary winding up.
e) To exercise reasonable care and skill in carrying out his duties and make such inquiries
as considered necessary.
Auditors’ Liabilities
The liabilities of auditors of a company can be studied under following heads:
a) Civil Liabilities.
Civil liabilities mean the disputes over losses caused to one party by acts of another. The civil
liabilities of an auditor can be for:-
i) Negligence ii) Misfeasance
i) Liability for Negligence (under law of agency)
Auditor being agent of the Shareholders is required to carry out his duties with reasonable care and
skill. If he fails to do so, he is liable to make good any loss caused to the third party.
Major legal decision
1) The London Oil Storage Co. Ltd. Vs Sear Hasluck & Co.
In this case, auditors were held liable for negligence. Auditors failed to verify the
physical existence of cash in hand. Cash balance as per books did not agree with
the physical balance, the difference was misappropriated by the cashier.
2) Irish Woolen Co. Ltd. Vs Tyson and Others.
In this case auditors were held liable for negligence. Profits were overstated by
not recording purchase invoices. He was held liable for having failed to exercise
reasonable care and skill.
3) Kingston Cotton Mills Co. Ltd.
In this case auditors were not held liable for negligence. It was held that it is not
the duty of auditors to take stock, if they accept certificate in the absence of any
suspicion, he has carried out reasonable care and skill.
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ii) Liability for Misfeasance
The term misfeasance means breach of duty. If auditor does something wrong in the performance
of his duties resulting in a financial loss to the company, he is guilty of misfeasance.
For example auditor’s duties are laid down in section 255 of the Companies Ordinance, 1984. If
auditor does not perform his duties properly and the company suffers loss he is liable for
misfeasance.
Major Case Laws
1) London and General Bank Ltd.
In this case auditors were held liable for misfeasance. The auditors failed to report that Balance
Sheet was not properly drawn:-
Large sums were advanced to the customers and interest thereon was accrued, in fact neither
advance nor accrued interest was receivable. No provision for bad debts was made and the
company paid dividend.
2) Under section 260 of the Companies Ordinance, 1984 if the auditors fail to report to the
members material misstatement of facts or give untrue picture to the members, and the default is
willful, auditors shall be punishable with fine which may extend to two thousand rupees.
b) Criminal Liabilities.
If auditor fails to comply with the requirements of Sections 157, 255 or 257, he shall be punishable
with fine up to Rs. 100,000/-. If he knowingly makes a false report for profit to himself or to put
another person to a disadvantage or loss for a material consideration, he shall also be punishable
with imprisonment for a period of one year.
417
If charges of forgery are brought against an auditor, he may be liable to imprisonment for a term
which may be extended to 2 years or fine up to Rs. 20,000 or both.
492
If in any report the auditor makes a false statement he shall be liable to imprisonment for a term
up to 3 years and a fine not exceeding Rs. 20,000
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RIGHTS, DUTIES AND LIABILITIES OF AUDITOR

Powers/Rights of an Auditor (255)

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